What is a Black Swan Event?

So the coronavirus pandemic is being referred to as a "Black Swan event." If you've been wondering what that means, you're not alone. When you understand what a Black Swan event is, you'll be able to see its impact over the next decade or more.

There's no question that for most of us, this event came out of the blue. Just two weeks ago, everything was normal, and suddenly, we're in the middle of the Zombie Apocalypse. An epic event, affecting almost everyone in the world that has thrown everything we know and love into chaos.

Turns out that's pretty much the definition of a Black Swan event. According to Wikipedia, The black swan theory is "a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight." In other words, no one saw it coming, but we'll all have seen it coming in a few months, when we connect the dots on the other side of this crisis.

"Before 1697, teachers confidently taught European schoolchildren that all swans were white. They had little reason to think otherwise, since every swan ever examined had the same snowy plumage. But then Dutch explorer Willem de Vlamingh landed in Australia. Among the many unlikely creatures down under - odd, hopping marsupials called kangaroos, furry duck-billed platypuses, teddy bear-like koalas - Vlamingh found dark feathered birds that looked remarkably like swans. Black swans? Indeed. Once observed, they were as unmistakable as they had been unimaginable, and they forced Europeans to revise forever their concept of "swan." In time, black swans came to seem ordinary."

He goes on to say, "Just because you haven't seen a black swan, doesn't mean that there are no black swans. Unlikely events seem impossible when they lie in the unknown or in the future. But after they happen, people assimilate them into their conception of the world. The extraordinary becomes ordinary, and "experts" such as policy pundits and market prognosticators kick themselves because they didn't predict the (now seemingly obvious) occurrence of the (then) unlikely event."

9/11, the housing bubble, your sister's failed marriage... in retrospect, they all seem predictable, even inevitable. It's human nature. It's also part of what's driving the news cycle these days. You can categorize coverage of the pandemic into four types of stories: what's happening, why it's happening, how bad will it get, and the Black Swan coverage: Should have seen it coming. Experts who were ignored as buzzkills five years ago are now being lauded as prescient geniuses.

Taleb says our brains are wired to tell stories that make sense of the world as we experience it. He says these stories are incredibly powerful because they only appear after an important event or after a person becomes famous. Think about it: you never hear origin stories of people who didn't make it big. Countless numbers of failed rock bands have started in their parents' garage, but The Who and the Ramones made it from the garage to the Big Time, so countless more teenagers will be imitating them, trying to be the next Black Swan band.

When we study the life of a rich or famous person, we go back to his or her origins. We tie the events and decisions that make up their lives into a narrative that makes sense of them. Then we try to replicate their success through imitation. Even the famous person falls prey to this self-selection bias; He looks at himself, a sample of one, and draws a sweeping conclusion, such as, "If I can do it, anyone can!"

Taleb would say the guy probably just got lucky. We drastically underestimate the impact of luck on history; most famous people were simply in the right place at the right time. But once we've observed something and created a theory about it, we see corroborating evidence for our theory everywhere; that's called Confirmation Bias.

This matters because humans try to make predictions about everything based on these theories. "Experts" will predict everything from the stock market to the rise of robots and the outcome of the Super Bowl based on a narrative that incorporates unknowable and unimaginable events from the past. That feels comforting, until the next Black Swan appears. And we'll never see it coming.

Here's Taleb's advice: "'De-narrate' the past and remember that stories mislead. That's the whole point: They are psychological armor against the 'slings and arrows of outrageous fortune.' Avoid nerds and herds and think for yourself."